PORTFOLIO

Accounting for Income Taxes: Uncertain Tax Positions — Selected Topics (Portfolio 5003)

BNA Tax and Accounting Portfolio 5003-2nd, Accounting for Income Taxes: Uncertain Tax Positions—Selected Topics, analyzes issues that arise due to the accounting for uncertain income tax position rules in FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes.

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DESCRIPTION

BNA Tax and Accounting Portfolio 5003-2nd, Accounting for Income Taxes: Uncertain Tax Positions—Selected Topics, analyzes issues that arise due to the accounting for uncertain income tax position rules in FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes. These rules originated in FASB Interpretation No. 48, Accounting for Uncertainty in Income Tax Positions—An Interpretation of FASB Statement No. 109, which addressed the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
A companion Portfolio, BNA Tax and Accounting Portfolio 5002-2nd, Accounting for Income Taxes: Uncertain Tax Positions, explains and illustrates the provisions in ASC 740 on uncertain income tax positions. One of these provisions requires that a company determine the interest and penalties that would accrue for an unrecognized tax benefit (i.e., a tax benefit that fails to meet ASC 740‘s recognition threshold and thus cannot yet be recognized in financial statements). This Portfolio explains the U.S. federal rules regarding interest and penalties for income tax deficiencies.
While the companion Portfolio explains the detailed rules for evaluating and measuring uncertain tax positions, this Portfolio discusses strategies for resolving uncertain tax positions with the IRS expeditiously to avoid many of these detailed rules that require considerable judgment to apply. It also discusses the IRS's ability to obtain the tax provision audit workpapers and a company's potential defenses to an IRS request for such workpapers. This Portfolio further explains many best practices in preparing for a financial statement audit of uncertain tax positions, and the rules and best practices in developing effective internal controls over the reporting of uncertain income tax positions.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5003-2nd, Dunbar, Walton & McEligot, Accounting for Income Taxes: Uncertain Tax Positions—Selected Topics (Accounting Policy & Practice Series).


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AUTHORS

AMY DUNBAR
Amy Dunbar, Ph.D. (Accounting), Associate Professor of Accounting, University of Connecticut; University of Texas at Austin; B.A. (Economics), Macalester College. Dr. Dunbar is an accounting professor at the University of Connecticut. She has written articles for publications including The Encyclopedia of Taxation and Tax Policy; Financial Reporting Watch; Journal of Public Economics; National Tax Journal; Public Finance Review; Tax Adviser; Tax Notes; Journal of the American Taxation Association; and Taxation for Accountants. She is on the editorial board of Accounting Horizons and the Journal of the American Taxation Association. Dr. Dunbar has received a number of teaching awards, and is a past vice-president of the American Taxation Association.

RICK WALTON
Rich Walton, J.D., LL.M., C.P.A., Buchalter Nemer PC; J.D. (cum laude) and LL.M. (Taxation), Georgetown University; B.B.A. (Finance), Pacific Union College (summa cum laude). Mr. Walton is of counsel to Buchalter Nemer PC. He has previously served at the Criminal Division, U.S. Department of Justice; and was an attorney-advisor to the U.S. Tax Court, Washington, D.C. A frequent speaker and author on tax controversy and Federal white collar criminal defense issues, Mr. Walton is Chair of the Planning Committee for Tax Controversies: A Day With the Government, held at U.C. Berkeley.

KATHLEEN MCELIGOT
Kathleen McEligot, C.P.A., Deloitte Tax LLP; B.S., University of California, Berkeley. Ms. McEligot is a tax partner at Deloitte Tax LLP, with over 32 years of professional experience. She specializes in corporate taxation, with extensive experience in the financial services, distribution and retail industries. As a firm designated specialist in Accounting for Income Taxes (ASC 740), she consults on income tax accounting issues for all types of companies. Ms. McEligot is a frequent lecturer, speaking before groups such as the Tax Executives Institute (TEI). She is a member of the American Institute of Certified Public Accountants and the California Society of Certified Public Accountants.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction, Scope, and Purpose of Portfolio

A. Scope and Purpose of Portfolio

B. Companion Portfolio

II. Strategies for Resolving Uncertain Tax Positions Expeditiously

Introductory Material

A. IRS Pre-filing Procedures

1. Industry Issue Resolution (IIR)

2. Pre-filing Agreements (PFA)

3. Advance Pricing Agreements (APA)

4. Compliance Assurance Program (CAP)

B. Post-filing Procedures

1. Joint Audit Planning

2. Limited Issue Focused Examination (LIFE)

3. Fast-Track Settlement (FTS)

4. Accelerated Issue Resolution (AIR)

5. Early Referral to Appeals

III. Dealing With Taxing Authorities That Request FIN 48 Workpapers

Introductory Material

A. Nature of the Papers Sought: FIN 48 Workpapers Defined

1. Tax Reconciliation Workpapers Defined

2. Audit Workpapers Defined

3. Tax Accrual Workpapers Defined

B. Discoverability of Workpapers

1. Tax Reconciliation Workpapers

2. Audit Workpapers

3. Tax Accrual Workpapers

C. FIN 48 Workpapers: Nature and Discoverability

D. Potential Defenses to Production

1. Government's Failure to Comply With the Powell Factors

a. Summons Enforcement Procedures

b. Taxpayer's Defenses Under Powell

c. Textron Case: Facts

2. Attorney Client Communications

a. The Service's Position

b. Taxpayer's Response: Kovel?

3. I.R.C. § 7525

a. The Service's Position

b. The Taxpayer's Position

4. Work Product

a. What: Compiled Documents or Opinion Work Product?

b. Who: Was the Work Product Disclosed to a "Potential Adversary"?

c. Why: Will the Court Use a "But-For" or "Primary Motivating Purpose" Test?

d. Where: Were the Documents Prepared in the Ordinary Course of Business or Because of a Public Requirement?

e. How Much: Aggregate vs. Specific Reserves

5. Textron, Unresolved Issues, and Proactive Planning

a. Textron's Troubled Legacy

b. Unresolved Issues: The Big Picture

c. Other Jurisdictions

i. State-by-State

ii. Foreign Jurisdictions

d. Proactive Practice Planning Points

IV. Calculations of Interest and Penalties

Introductory Material

A. Interest on Underpayments/Overpayments of U.S. Income Tax

1. Period for Which Interest Is Due

a. Underpayments

b. Overpayments

2. Interest Rate

a. Corporate Underpayments

b. Large Corporate Underpayments-Hot Interest

c. Overpayments

d. Interest Rate Determination and Compounding

3. Suspension of Interest

a. 10/21 Day Window

b. Suspension of Interest Due to Delay of Demand for Payment

c. Suspension of Interest: Deposits to Suspend Interest on Potential Underpayments

4. Interest on Penalties

5. Deficiency Assessment With a Credit Elect

6. Global Interest Netting

7. Restricted Interest

a. Net Operating Loss (NOL) or Capital Loss (CL) Carryback

b. Foreign Tax Credit Carrybacks

c. Excessive Refunds From Carrybacks

B. Penalties on Underpayments of U.S. Income Tax

1. Accuracy Penalties-I.R.C. § 6662

a. Negligence/Disregard of Rules or Regulations-I.R.C. § 6662(c)

(1) Negligence

(2) Disregard of Rules or Regulations

b. Substantial Understatement-I.R.C. § 6662(d)

(1) General Rule

(2) Tax Shelter Rules

c. Substantial or Gross Valuation Misstatement-I.R.C. § § 6662(e) and (h)

2. Reportable Transaction Accuracy Penalty-I.R.C. § 6662A

a. Reportable Transaction Definition

b. Disclosed Transaction Accuracy Penalty

c. Undisclosed Transaction Accuracy Penalty

d. Statute Extension for Undisclosed Listed Transaction Returns

e. Ruling Requests

f. Protective Disclosure

3. Penalty for Failing to Include Reportable Transactions in the Return-I.R.C. § 6707A

4. SEC Reporting-I.R.C. § 6707A(e)

5. Fraud Penalty-I.R.C. § 6663

6. Coordination of Penalties

7. Avoiding a Penalty

a. Reasonable Cause Exception

(1) Taxpayer's Effort to Assess the Proper Tax Liability

(2) Reliance on Advice

b. Strengthened Reasonable Cause for § 6662A Penalty

c. File a Qualified Amended Return

d. File a "Clean" Original Return, Followed by an Amended Return

e. Disclose

V. Preparing for the Financial Statement Audit: Documentation Requirements

Introductory Material

A. General Documentation Requirements for the Auditor

1. SEC

2. PCAOB

3. AICPA

B. FIN 48 Documentation

1. SEC Perspective

2. Auditor Perspective

a. Identification of All Material Tax Positions

b. Unit of Account

c. Recognition and Measurement Process

(1) Scope

(2) Third Party Opinions

d. Classification

e. Disclosures

VI. Internal Control Considerations Under FIN 48

Introductory Material

A. FIN 48 Control Objectives: Identifying Tax Positions

B. FIN 48 Control Objectives: Applying the Recognition Rules

C. FIN 48 Control Objectives: Measuring Uncertain Tax Positions

D. FIN 48 Control Objectives: Subsequent Recognition and Derecognition

E. FIN 48 Control Objectives: Interest and Penalty Measurement

F. FIN 48 Control Objectives: Classification

G. FIN 48 Control Objectives: Disclosures

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Glossary

Worksheet 2 IRS Listed Abusive Tax Shelters and Transactions

Worksheet 3 The Use of Assertions in Obtaining Audit Evidence

Worksheet 4 Ernst & Young: Top 10 Leading Internal Control Practices

Worksheet 5 Ernst & Young: Top 10 Leading Internal Control Practices

Bibliography

OFFICIAL

Statutes

Federal

Internal Revenue Code

State

Public Laws

Regulations

Cases

American Institute of Public Accountants:

AICPA Code of Professional Conduct

AICPA Statements on Auditing Standards

Accounting Principles Board Opinions

Financial Accounting Standards Board:

FASB Statements of Financial Accounting Standards

FASB Interpretations

Public Company Accounting Oversight Board:

PCAOB Auditing Standards

PCAOB Releases

Securities and Exchange Commission:

SEC Releases

SEC 10-Qs

Internal Revenue Service:

Internal Revenue Rulings

Internal Revenue Procedures

IRS Delegation Orders

IRS Chief Counsel Memos

IRS Policy Statements

IRS Announcements

IRS Notices

IRS Information Releases

IRS Internal Revenue Manual

IRS Publications

UNOFFICIAL

BNA Portfolios

Publications

CPA and Law Firm Publications

Speeches